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Arbitrating Employment Disputes: A Quicker and Less Costly Method of Resolution

January 1996

Employee-employer disputes continue to provide plenty of work for lawyers and frustration for executives, managers and financial officers. Even the weakest claims of discrimination or wrongful discharge may take years to resolve and require hours of management’s time reviewing files and preparing and re-preparing to give testimony. In 1991, the United States Supreme Court recognized that the parties to an employment agreement may make a broad range of employment disputes subject to arbitration. The Court thereby opened the way for a promising alternative to administrative agencies, which frequently lack the resources to resolve claims quickly, and courts, whose motion and discovery procedures can result in substantial pre-trial costs.

Arbitration uses a neutral third party to resolve disputes. Accordingly, arbitration avoids difficult-to-predict juries. Typically, the neutral is a person experienced in commercial matters such as a lawyer, business person or academician. Once a person initiates arbitration and the neutral is selected, a hearing often occurs within three to six months. In order for an employer to take full advantage of arbitration, it should make arbitration agreements with its employees before disputes arise. The preferable time for such an agreement is at the outset of the employment relationship, when the parties might include arbitration as one of the terms in their contract of employment. The parties can, however, reach an enforceable agreement to arbitrate at any time, even after the dispute arises or the employment relationship ends.

To maximize the likelihood that an arbitration clause will be enforced, an employer should also take pains to make certain that its employees have entered into the arbitration agreement voluntarily. At a minimum, arbitration means that the employee will be foregoing his right to have a jury decide his case; the arbitration clause might also limit his right to punitive damages and attorneys fees if he prevails. Because the right to a jury, as well as the rights to punitive damages and attorneys fees are statutorily granted, a court will enforce a waiver of such rights only if the waiver is knowing and voluntary. Accordingly, an employer must be prepared to demonstrate that its employee understood the meaning and significance of the arbitration clause he signed, had a reasonable opportunity to review the clause, and chose to sign the clause of his own free will.

To assure the availability of arbitration in the broadest range of circumstances, employers should take the following precautions:

  • make certain that the arbitration clause applies to all employment-related claims, whether arising before, during or upon the termination of the employment relationship, and specifically reference claims arising under Title VII, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family Medical Leave Act, and other federal and state laws that serve as a source of employee rights;
  • whether the arbitration clause appears in a general employment contract or a separate document, make certain that the language is clear and that the employee is given an adequate opportunity to understand the meaning and significance of the clause, including the express right to consult an attorney before agreeing to arbitrate employment disputes;
  • consider providing the employee who agrees to arbitrate with the same range of remedies available to him in court or before the administrative agencies that would otherwise have jurisdiction over the parties’ dispute.

In recent months, two federal agencies, the Equal Employment Opportunity Commission and the National Labor Relations Board, have announced efforts to limit mandatory arbitration. Both agencies have taken the position that only when an employee voluntarily agrees to submit a particular dispute to arbitration, without threat of not being hired or of being fired, should arbitration proceed. However, in light of the 1991 Supreme Court case as well as the strong policy favoring alternative dispute resolution procedures, the merit of these agency positions is questionable and should not deter employers from making careful use of this advantageous process.